ING Vysya Bank (IVB) is on right track
Since 2009, IVB has emerged stronger with a structurally improved balance sheet and regional profile. Bank delivered earnings CAGR of 37% and RoA expansion of 30bps over FY10-12. In spite of increasingly challenging macro, we believe IVB would continue to perform well due to following
Robust loan profile: Pre-dominantly a working capital bank in wholesale/SME segments (combined ~75% of book). Well-diversified credit profile with low exposure to ailing sectors. Largely secured retail book.
Resilient NIM outlook: Portfolio spread has displayed impressive resilience. CASA ratio to improve driven by acceleration in savings growth. Favorable product mix shift and decline in wholesale rates to also support margin.
Huge headroom for opex leverage: Shedding of legacy-related employee cost and productivity improvement to drive lower-than-asset opex growth. Cost/income ratio expected to improve from 59% in FY12 to 54% by FY14.
Strong asset quality: Gross NPL ratio declined sharply over FY10-12 aided by benign slippages. Restructuring has been minimal (~1.4% of loans). Outlook on slippages/restructuring remains non-perturbing.
Comfort from high PCR: Counter-cyclical buffer build over past two years (PCR at 90%); Net NPL/Networth at just 1.3%. Opex leverage benefits to fully transmit to bottomline; earnings to witness a brisk 23% CAGR over FY12-14.
Secular RoA improvement: Stable margins, decline in cost/income ratio and modest credit cost to underpin continued RoA expansion. Most banks are facing a declining RoA curve. Bank well-capitalized with Tier-1 ratio at 10.7%.
Fits in our theme of ‘Buying Certainty’ v/s ‘Buying Valuation’
Investment theme in the banking sector has been unilateral for some time given unnerving macro situation. While high preference for certainty has enriched valuation of few large private banks, IVB has been ignored despite its robust fundamentals. An improving RoA metric differentiates the bank from most others and therefore stock valuation could likely see a sharp re-rating. Initiate coverage with a BUY rating and 9-month price target of Rs460.
|Y/e 31 Mar (Rs m)||FY11||FY12||FY13E||FY14E|
|Total operating income||16,615||18,781||21,818||25,688|
|Yoy growth (%)||14.6||13.0||16.2||17.7|
|Operating profit (pre-provisions)||6,355||7,679||9,495||11,763|
|yoy growth (%)||31.6||43.2||21.5||24.6|
|Adj. BVPS (Rs)||200.6||254.6||283.0||317.8|
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